The cost of saving the planet is rising – and has been for some time
Electricity customers here will have to pay more in future to support the development of wind farms and other renewables
Experts have calculated that, by the end of 2020, consumers and businesses will have paid an extra €1.9bn this century to fund price supports for wind-generated electricity
In the 12 months to the end of October 2020, households and employers will contribute about €150 million to wind farms and other renewable generators through their electricity bills. Next year, we will pay an extra €90 million in carbon tax. Last week, a group backed by big businesses such as Danone and Avonmore milk owner Glanbia asked the Government to consider adding a further €5.70 a month to household energy costs to fund a biogas industry. The literal cost of saving the planet is rising.
It has been doing so for some time.
Experts hired by industry lobby group the Irish Wind Energy Association (IWEA) calculate that, by the end of 2020, consumers and businesses will have paid an extra €1.9 billion this century to fund price supports for wind-generated electricity.
Households and employers do this through a mechanism called the renewable energy feed-in tariff – Refit for short – which guarantees a price of about €80 a mega watt hour that businesses such as wind farms get for the electricity they produce. As this is generally higher than the actual market price, consumers and businesses make up the difference through a public service obligation charge tacked on to every electricity bill.
Every October, energy watchdog the Commission for the Regulation of Utilities (CRU), calculates what the level of this subsidy should be for the next 12 months and adds the sum to electricity bills. The charge has also included support for other generators, including peat-fuelled electricity plants, for which support ends on December 31st this year. But wind has been the biggest beneficiary as the most common source of renewable energy in Ireland.
While a lack of staff prevented the CRU from giving a detailed breakdown, the big beneficiaries of the €1.9 billion included State companies, such as the ESB, Bord na Móna and Coillte, which have all owned, operated and developed wind farms. The private sector also did well, with companies including SSE Airtricity and Energia getting some of the cash.
A more recent market entrant, Dublin-quoted Greencoat Renewables, which buys completed wind farms, was drawn here because the Refit system guaranteed returns.
The charge has fallen over the last year. In the current period, which ends on September 30th next year, homes will pay €2.84 a month, while small businesses will contribute €10.35 a month. That’s a cut of €1.62 of the charge in previous years. The overall reduction is 16 per cent, mainly because generators received €186 million more than they should have in the 2017/18 period and the CRU is now clawing this back. The regulator cut it by 50 per cent in October 2018.
Justin Moran, the IWEA’s spokesman, explains that the justification for all this is to encourage wind farm development.
“They need a considerable up-front investment,” he says. This is around twice the cost of building a gas-fuelled electricity generator. Most Irish gas-fired plants produce about 400 mega watt (MW) hours of electricity – enough for 400,000 average homes – and cost in the region of €400 million to build. In contrast, 400MW of wind costs €800 million to construct.
Price of electricity
Moran points out that wind farms, which now generate about 30 per cent of our power, have cut the wholesale price of electricity by €2.3 billion over the last 20 years, €400 million more than the €1.9 billion that consumers paid to support them. However, building wind farms involved costs other than their development, including changes to the national grid so it could distribute the electricity they generate to customers.
When consultants Baringa, whom the IWEA hired, added those expenses, it found that tapping wind for power cost homes and businesses an extra €63 million net over 20 years.
“We’d love to say that there had been an actual saving,” Moran concedes. However, he points out that wind farms have cut the Republic’s greenhouse gas emissions by 33 million tonnes over that time, with the reduction is now running at around 2.7 million tonnes a year. It also saved €2.5 billion in natural gas imports. The CRU acknowledges that wind has a “dampening effect” on electricity prices.
Despite recent cuts, the indications are that electricity customers will have to pay more in the future to support the development of wind farms and other renewables. We now have 3,500MW of wind power on our electricity system, but we need a further 8,200MW. About 3,500 of that will be offshore, the rest will be on land.
This is required to meet the Government target that renewables supply 70 per cent of all electricity needs by 2030 even as the State tries to attract more data centres to the Republic. These consume vast quantities of power. National grid operator Eirgrid calculates that by 2027, that at current rates, data centres will be using as much electricity as Dublin does now. In essence, their impact will be the same as if another city the size of the capital were added to the grid.
Meeting that demand could cost €9 billion, professional body Engineers Ireland calculates. Already, a combination of multinationals such as Norway’s Statkraft and German giant, Innogy, along with locals such as ESB, plan to spend €6 billion building wind farms in the Irish Sea.
New wave of investment
This is a new wave of investment in the Republic, but it is likely that the public will pay to prop up the price paid to these businesses when they are generating electricity.
The Government will use a new mechanism to support these developments, called the Renewable Energy Support Scheme. The industry believes this will be far cheaper than Refit (which is now closed). It will rely on an auction, run by the Single Electricity Market Operator and Eirgrid, where companies will bid on the prices at which they can supply electricity. The lower the offer, the more likely it is that they will get a contract.
This approach has proved cheaper elsewhere. Moran says that recent auctions in Britain have attracted bids as low as €40 per MW hour, about half what Refit pays, but he cautions that it is unlikely to be as low here as there are extra development costs.
There is another saving coming down the line. Under the current system, if the market price exceeds the guaranteed price, the supplier keeps the difference. Under the new scheme, they will have to refund that sum to the regulator, as they can only take the price that they bid in the first place.
Thus, if they are contracted for €45 a MW hour and are paid €50, they must refund the €5, which should ultimately be repaid to consumers and businesses in the form a lower public service charge.
According to a spokeswoman for the Department of Communications, Climate Action and the Environment, the Government is drafting the new renewable energy scheme’s terms and conditions. The European Union will scrutinise the arrangements to ensure they do not break any state aid rules.
Moran says the industry expects auctions to begin next year. As a result, we do not yet know how much it will cost, but it is likely that the scheme will add to the public service levy on our electricity bills.
While it gets a lot of the attention, electricity only accounts for 20 per cent of energy consumption; the rest is down to other fuels used for home heating, road, marine and air transport.
This is partly because, thanks to the €1.9 billion paid by households and employers, the electricity generation market has been successful in shifting away from fossil fuels. Renewables now generate 30 per cent of our electricity and Eirgrid recently said the share should hit 40 per cent some time next year, hitting a target agreed with the EU.
Moran explains that electricity will increasingly be used to power transport and heat, helping to displace fossil fuels from these areas. Carbon tax is one way of spreading the cost more generally. The Minister for Finance, Paschal Donohoe, announced last month that the Government would increase this by €6 a tonne, from €20, next year and it intends going all the way to €80 by the end of next decade. Conor Minogue, senior executive, infrastructure, energy and environment with Irish Business and Employers’ Confederation (Ibec) believes it could increase again after 2030.
His organisation would have preferred a €10 a tonne increase in 2020. The body supports gradually increasing the charge to €80 because this because this would give business certainty.
Ibec figures show that households paid €246 million in carbon tax last year, about 59 per cent of the €419 million total that the charge yielded to the exchequer. Their share of the extra €90 million raised by next year’s increase should be about the same.
The Government intends ringfencing that cash to pay for various carbon reduction measures, including €6 million to aid areas in the midlands which are going to suffer as peat is phased out as a fuel. Other purposes will include building more charging points for electric cars, home upgrades and other purposes.
Minogue agrees that using the tax in this way helps to increase the overall benefit it will deliver. In its own climate change paper, published earlier this year, Ibec proposed that some of it should be used to prevent carbon leaking – that is jobs being siphoned off to countries where the tax is not applied.
Developments in both the political and real climates mean future governments will make cutting greenhouse gas emissions a priority. But there is a long way to go. Figures from the Environmental Protection Agency show that we produced 67 million tonnes of carbon dioxide and other substances that are heating the atmosphere in 2017.
The State body said this was low in overall terms, but it meant that, as individuals, we were among Europe’s worst polluters.
In his first speech as Minister for Climate Action and Environment, Richard Bruton said bluntly that the Republic was “way off course” to reach its 2020 targets. That meant an overhaul of policy to get us back on track over the next decade, he warned. Those costs are likely to keep rising.